Partners Group has shifted its investment focus to platform deals amid concerns that today’s “challenging” market could undermine future valuations.
The Zug-headquartered investment firm, which previously looked at high-quality assets that could maintain cashflow in the event of a market downturn, has begun targeting fragmented sectors in which consolidation has been shown to improve pricing resilience to volatility, according to its H2 2017 Private Markets Navigator report released on Wednesday.
The firm cited US President Donald Trump, Brexit and North Korea as examples of potential sources of instability in the current investment environment.
Partners now looks for companies with a well-established acquisition strategy for which it will continue to acquire add-on companies, diversify the revenue base and increase operational efficiency. In January, the firm oversaw the acquisition of pre-owned hardware provider Curvature as part of a new platform strategy for portfolio company and IT maintenance specialist Systems Maintenance Services.
“Such assets can often command an improved multiple at exit, since being the scale player in a consolidating sector commands a premium valuation,” the report noted.
Valuations in US private equity transactions as a multiple of EBITDA reached a record high in the first half of this year at 13.7x, according to a report by valuation firm Murray Devine. Although Partners expects moderate growth to persist in the near to mid-term, the firm said valuations were likely to contract as the market re-rates its discounting of tail risks. Rates may rise more quickly than anticipated, the report noted.
The elevated pricing has also extended to the secondaries market. Partners Group said inflection buyout assets that have just begun the value creation process currently represent the best relative value, while the firm underweighted mature buyout assets.
Demand from new market entrants is expected to waiver in the event of a market downturn, the report noted. However, valuation pressures could present an opportunity to experienced secondaries investors who are able to take advantage of a buyers’ market.
Partners Group secured more than €6 billion of commitments for direct private equity investment in July. The firm held a final close on a €3 billion cap for its flagship Partners Group Direct Equity 2016 fund, which features commitments from Clwyd Pension Fund and Australian superannuation fund CARE Super, and raised an additional €3 billion through client mandates and several integrated investment programmes.